The OECD Global Economic Outlook

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1 The OECD Global Economic Outlook Nigel Pain OECD Economics Department Edinburgh, 11 July 2013 NCSL Symposium for Legislative Leaders 1

2 Overview Presentation structure Current situation and prospects. Global economic developments Key forces acting on the major economies Prospects for Key policy requirements. Tackling the euro area crisis. Long-run fiscal needs. 2

3 Recessions and recoveries Financial crisis: deep recession, slow recovery 3

4 Recessions and recoveries There are divergent trends among the major OECD economies 4

5 Recessions and recoveries Growth outcomes in the major emerging markets have also diverged 5

6 Recessions and recoveries The recession has deepened in some parts of the euro area 6

7 The recovery in the G-20 The global recovery is proceeding slowly 7

8 Global trade growth Global trade growth remains very weak The gradual accumulation of trade restrictions in the G20 in recent years remains a concern. 8

9 Slowdown in EME growth Growth has slowed sharply in the emerging market economies Year-on-year real GDP growth, per cent 11 9 China India Brazil Russia South Africa

10 Business surveys Key business surveys (PMIs) provide mixed signals across economies Source: Markit. Composite PMI series, seasonally adjusted. 10

11 Financial conditions OECD financial conditions are improving The FCI index weights together a large number of financial variables (asset prices, interest rates, credit conditions, exchange rate). A unit change in the FCI changes the level of GDP by 1% after 6 quarters. 11

12 Financial conditions: Japan Activity in Japan supported by recent financial market changes 12

13 Banking sector The euro area economy is held back by a very weak banking sector Source: ECB, national central banks 13

14 Credit conditions and credit growth also differ markedly across economies Cost of credit 1 Growth of credit to the private sector 2 7 % 6 5 % 7 % % Note: Euro area countries shown in yellow, others in red. 1. Interest rate on new loans to non-financial corporations (all maturities) with the exception of Greece where it refers to new loans with maturity of up to one year. For the United States and the United Kingdom, interest rate on outstanding loans. 2. Year-on-year percentage change in the three months to February Source: Economic Outlook May 2013 press conference presentation. 14

15 The recovery in the G-20 Household debt deleveraging has only taken place in a few countries Change in ratio household gross debt income ratio between 2007 and 2012 (% pts) Source: May 2013 OECD Economic Outlook 15

16 Financial conditions: house prices Cross-country housing market developments continue to diverge Source: OECD House Price Database. US house price-rent ratio now back to long-term average. 16

17 Fiscal consolidation Fiscal consolidation is damping growth, but is generally expected to ease off in 2014 General government data. The fiscal multiplier is likely to be close to unity, especially as simultaneous consolidation across OECD. 17

18 Economic prospects The Global Outlook (OECD, May 2013) Annual GDP growth (calendar year, per cent) United States Japan Euro area China Brazil India Global World Trade growth Source: OECD Economic Outlook No

19 US economic prospects The US Outlook (OECD, May 2013) Calendar year growth unless stated (%) GDP Household consumption Housing investment Employment Unemployment rate (Q4) General govt. budget balance (% GDP) Current account balance (% of GDP) year bond rates (% pt) Source: OECD Economic Outlook No. 92. Gen. Govt. debt (% GDP)

20 Economic developments Structural factors, institutions & policies are clearly influencing economic performance Economic outcomes over 2011 to 2013 USA Euro area UK Average annual GDP growth (%) Cumulative fiscal consolidation (% of GDP) Average annual jobs growth (%) Average annual inflation (PCE, %) All data taken from the May 2013 OECD Economic Outlook data are OECD projections. Estimates of fiscal consolidation are based on the change in the underlying primary budget balance between 2010 and PCE refers to the private consumption deflator which is comparable across countries. 20

21 The outlook: unemployment Labour market conditions are diverging Source: May 2013 OECD Economic Outlook 21

22 The outlook: Inflation Underlying inflation to remain moderate Core inflation, 4-quarter percentage change Note: United States - deflator of personal consumption expenditures (PCE) excluding food and energy; Euro area - harmonised index of consumer prices (HICP) excluding food, energy, tobacco and alcohol; Japan - consumer price index (CPI) excluding food and energy and consumption tax. Source: OECD Economic Outlook May

23 The outlook: global imbalances Global imbalances remain structural reforms in all economies, and fiscal consolidation can help. Source: May 2013 OECD Economic Outlook. 23

24 Key policy requirements Key policy requirements Maintain accommodative monetary policies. QE tapering likely to start in the US. Policy rate increase not merited before 2015 given unemployment projections. Further easing merited in euro area (inflation well below target). Continue fiscal consolidation, based on structural not headline budget objectives, in most of OECD. Composition should be growth/equity friendly. Clear and credible medium-term plans needed in some economies, especially Japan and at US Federal level. Continue structural reform efforts to boost growth and improve labour market outcomes. Strengthen macro-prudential policies & financial reforms. Maintain open markets for global trade. Maintain progress in tackling euro area crisis. 24

25 Key risks Risks to the outlook Another leg to the euro area crisis. Very weak economic activity and persistent unemployment could prolong stagnation. Potential financial market instability in the run-up to the eventual exit from unconventional monetary policy Remaining fiscal policy risks, e.g. in relation to the impact of poorly targeted budgetary sequestration in the United States and unsustainable public finances in Japan Potential growth rates turning out, post-crisis, to be lower than we think (long-run higher unemployment). 25

26 Recent developments Signals of the imminent start to tapering of Fed s QE purchases have unsettled markets US 10-year government bond yields (%) 2.9 Minimum value in 2013 Maximum value in This has led to significant re-pricing of financial assets worldwide, which will damp the momentum of the recovery. (ECB and Bank of England actions on July 4 attempted to calm markets.) US 30-yr mortgage rates up by 1%pt, junk bond rates up by 2%pt. 26

27 Recent developments Partial price correction in equity markets Emerging market growth forecast by private institutions revised down by 0.3 percentage points on average since nid-may. 27

28 Tackling the euro area crisis Tackling the euro area crisis Continue progress in tackling the imbalances that built up prior to the crisis. Closer surveillance and co-ordination of policy choices. New six-pack and two-pack procedures. Is contracturalisation of policy commitments possible? Boosting growth at EU level the Single Market, global trade initiatives. Continue efforts to block adverse feedback loops Between banks and governments. Between exit risk and government bond yields. Between bond yields and debt sustainability. 28

29 Tackling the euro area crisis Tackling the euro area crisis (2) Good progress has been made. Rebalancing is well under way with correction of cost competitiveness and elimination of current account deficits in the weakest economies. Area-wide government debt is nearly stabilised, and much of the necessary fiscal consolidation has been implemented. Fiscal compact should ensure longer-run sustainability. Greater monitoring of structural policy implementation. ECB whatever it takes announcement has damped exit risks (though issues remain about the use of OMT if needed). The key issue remaining is the weakness of the banking sector. 29

30 Euro area rebalancing Unit labour costs are becoming more closely aligned in many countries Unit labour costs in the euro area (1998=100) Further adjustment needed to help periphery economies gain competitiveness against lower cost competitors (Central & Eastern Europe, Asia). 30

31 Structural reforms Key structural reforms are underway The OECD identifies key structural reform priorities in its annual Going for Growth publication. Responsiveness to reform priorities has risen since start of the crisis. Responsiveness highest in euro area external deficit economies. 31

32 Tackling the euro area crisis Stopping the feedback between national banks and governments is key Ultimately, a full banking union is required: Single supervisory mechanism (SSM), single resolution mechanism (SRM) and common fiscal backstop. SSM currently planned for large banks in Issues of supervision small banks, and safeguarding rights of non-euro area EU countries. SRM legislative proposals in Issue of who pays creditors, banks (pre-funded schemes) or taxpayers. Once SSM in place, funds from ESM can be used to recapitalise banks directly 32

33 Euro area banking union Recent progress towards a banking union in the euro area Two agreements in June: to establish principles for the use of the ESM to recapitalise banks and set EU rules for bank resolution. In some respects a positive step, but Not clear that enough has been done to sever the links between weak banks and stressed sovereigns: 60 billion euro ceiling on ESM financing Any ESM financing would not begin before mid-2014 National governments have to contribute first before ESM financing can be envisaged Bail-in of some creditors (not insured deposits). Bank resolution remains national, maintaining incentives for regulatory forbearance 33

34 Tackling the euro area crisis In medium-term more capital is required across European banking system Indicative estimates of additional capital required over Sep-2012 levels to bring core Tier 1 capital to benchmark of 5% of (unweighted) total assets [% of GDP]. Note: Based on consolidated balance sheets as of September 2012, prepared on an IFRS basis. Using a bottom-up approach to estimate additional capital for each bank. The total capital shortage is around EUR 400 billion. The 5% benchmark equity ratio is based on the maximum leverage of 20-times (see Blundell-Wignall and Atkinson, 2012). Source: OECD Economic Outlook

35 Long-term fiscal challenges Medium-term fiscal consolidation needs vary across countries Source: OECD May 2013 Economic Outlook long-term database. 35

36 Structural reforms Structural reforms to boost employment can also improve fiscal outcomes Effect of 1% higher potential employment on the primary budget balance 36

37 Summary A multi-speed global recovery continues. Large policy challenges remain in many countries. New uncertainties about emerging markets. 37

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